ECB, Bank of England to hold rates steady

FRANKFURT 
Central banks for Europe and Britain are almost certain to keep their benchmark interest rates at record lows on Thursday amid early signs of economic recovery, while attention will focus on whether the Bank of England will hold back from further expanding the money supply.

Both the European Central Bank and the Bank of England are expected to keep rates at 1 percent and 0.5 percent respectively when they announce their monthly decision.

Recent economic data in both the euro zone – a block of some 320 million people comprising nearly 17 percent of the world's output – and Britain have suggested early signs of an economic turnaround.

That will leave all eyes on the Bank of England's so-called quantitative easing program to stimulate growth by boosting the domestic money supply.

BoE policymakers surprised analysts last month when they opted to hold the program at 125 billion pounds, despite access to a further 25 billion pounds under the banks' current mandate from the Treasury.

With recent data on Britain's key services and manufacturing industries showing further improvements on Wednesday, analysts think it is likely the British bank will see enough upbeat signs to again refrain from pumping more money into the economy, at least for now.

Increasing the supply of money can stimulate growth, but risks worsening inflation down the road. It comes on top of steep cuts in interest rates – the usual tool for boosting the economy.

The ECB, meanwhile, mindful of some signs of economic recovery, will consider European Union statistics that last week showed unemployment in the euro zone countries rose to a level not seen in a decade and consumer prices slipping more than expected. Eurostat said it estimated consumer prices fell 0.6 percent in July compared with the year-ago period.

Meanwhile, the office said unemployment rose to 9.4 percent in June – the highest level since June 1999 – after 9.3 percent in May.

Still, analysts anticipate the bank will keep rates on hold and not announce any new measures on "enhanced credit support," the ECB's version of quantitative easing.

"We suspect the ECB will enjoy the luxury of a relatively non-contentious get-together," Calyon Credit Agricole analysts said in a note to clients.

"Inflation may have been lower than expected, but there has been nothing to force any major reassessment," Calyon said.

In May, the ECB announced it would buy euro60 billion ($86.4 billion) in covered bonds, a relatively safe way to provide markets with more cash. The program is ongoing and the ECB said earlier this week it's spent just euro4.9 billion of the allotted money so far. The bank could announce more details about the ongoing program Thursday.

Though many observers have begun to speculate about exit strategies away from the "extraordinary measures" the ECB has undertaken in concert with the BoE, U.S. Federal Reserve and others, UniCredit's chief economist Aurelio Maccario said interbank lending is still far from past levels and the "exit is not nigh."